Blockchain technology will transform the way regulators work, according to a member of the wholesale markets team at the Financial Conduct Authority, which is known to support the idea of "RegTech".
Makoto Seta, a senior associate from the trading conduct and settlement policy division at the FCA, was part of a panel hosted by Norton Rose Fulbright at its Unlocking the Blockchain session.
Seta said: "Might the blockchain transform the way the regulators work? I absolutely agree with that. I think there are a lot of benefits to be harnessed from distributed ledger, in terms of traceability and tracking, that makes it easier for us.
"I think regulators do now perceive this to be important; the degree of importance will probably differ between regulators. We look very seriously at it and have been doing that for some time now, looking at the technology and how it's been used. I think the issue that we have is, trying to sort of marry up the technical codes and how that interacts with the legal codes."
Looking ahead, Seta said that in the instance of smart contacts, for example, the FCA might have to "check whether the technical code that these smart contracts are based on is in line with the legal environment and jurisdiction that they use". He added: "I think we need to delve into the details of this and for that reason I think it does require a lot of knowledge build up."
Seta explained his remit at FCA covered the likes of algorithmic trading and regulation. He said his interest in distributed ledger technology was not in relation to the Bitcoin blockchain but rather in institutional use cases. He said: "I felt it was useful to get to know how it's going to be used given that institutions are going to come to talk to the FCA about it."
Regarding the question of cyber-risk, Seta said there may be pros and cons. He said: "One of the obvious benefits is that that data is going to be distributed, therefore it's going to be more robust. Security-related technologies are constantly evolving so, from a regulator's perspective, what we do need to know is how secure they are."
Seta told IBTimes UK the FCA was interested in how blockchain technology could reduce the burden of regulations. Asked whether the UK was further ahead in this capacity, he said: "We hope so."
Seta was joined on the panel by Will Nash, co-founder, Kwôri; Nicolas Cary, co-founder, Blockchain; Jeremy Millar, partner, Magister Advisors LLP; and Sandra Ro, group digitization lead, CME Group. The session was chaired by Sean Murphy, partner at Norton Rose, and the audience contained blockchain luminaries such as Ethereum's Vinay Gupta and John Lilic from ConsenSys, who was visiting from New York.
Regulatory impact of blockchains
Imogen Garner, a partner at Norton Rose Fullbright, carried on the theme of regulatory impact of blockchains at an enterprise level. She pointed out that many of the institutions that are going to be interested in using blockchain technology are already regulated financial institutions. So concerns about the scope of regulation that impact Bitcoin, for example, are not really relevant to them. However, she said "they will be interested in the way in which the use of blockchain technology impacts the risk profile of those institutions".
She added: "There may also be more technical questions, for instance if a regulated institution is using blockchain technology, does that involve a sort of outsourcing in relation to which it would need to comply with FCA outsourcing rules. Well those rules were written, certainly not in contemplation of this type of activity - so how would they apply? I don't think people have really worked that out yet."
Garner said blockchain might be a great way for firms to demonstrate with certainty they are compliant with regulatory obligations, and the flipside of that, from an enforcement perspective is that maybe there might be a clear way to demonstrate that firms have not complied.
There have been publications from the UK FCA in relation to what it calls "RegTech", whereby technology can facilitate the delivery of compliance with regulatory requirements, especially the gargantuan volume of reporting requirements that have followed the financial crash.
She added: "I wonder whether there might be a possibility of blockchain technology to underpin smart contract-type applications that might work to ensure firms comply with regulatory rules, or maybe comply with their own internal policies and procedures, system and controls.
"The difference here with technical code is that compliance is ensured simply by virtue of the operation code. So would it be safer from a regulatory perspective? Would we see fewer instances of breach?
"And if we had code that did all these wonderful things, whose job would it be to write it –institutions themselves, or will we see the scenario where regulators in the public sector have to write the code?
"In terms of putting us out of a job, I don't see how it would be possible to automate in a regulatory sphere the making of regulatory policy; you can't code the process for deciding why it is that you are going to regulate something. So I think Makoto, our FCA panellist, is probably going to be in a job for much longer than the rest of us."